Public Bill Committee

[Mr. Joe Benton in the Chair]
FS 07 British Bankers Association

The Committee deliberated in private.

On resuming

Q181The Chairman: Good morning. I remind hon. Members and witnesses that we are bound by the Standing Orders and the deadline agreed to on Tuesday. That means that this mornings session must end at 10.25 am. Obviously, I will not want to interrupt hon. Members or witnesses in the middle of sentences, but I will do so if it becomes necessary.
We will hear evidence from the British Bankers Association, the Building Societies Association and the Confederation of British Industry. I welcome the three witnesses to our meeting this morning and ask them to introduce themselves. I do not think that Angela needs any introduction, but it might be helpful to younger members of the Committee.

Angela Knight: Good morning. My name is Angela Knight. I am the Chief Executive of the British Bankers Association.

Adrian Coles: Good morning. My name is Adrian Coles. I am Director General of the Building Societies Association.

Matthew Fell: Good morning. I am Matthew Fell, a director at the Confederation of British Industry.

Q182Mr. Mark Hoban (Fareham) (Con): The flagship measure in the Bill is the new Council for Financial Stability, the aim of which is apparently to create clarity where there was previously confusion. You may not have had a chance to read the evidence that was given to us on Tuesday, but the Minister was clear that responsibility was shared between the Bank, the Treasury and the Financial Services Authority. In the afternoon session, the FSA said that it had secondary responsibility for financial stability. The Bank acknowledged that the Chancellor was clearly in the lead and said that its own powers in relation to financial stability were limited to the resolution regime and to its responsibility for the payment system. Do you think that the situation is any clearer now than it was at the height of the crisis?

Angela Knight: I shall open with our view. When I read the Bill to start with, I thought that at least it may give us some more clarity, but when I read the evidence that was given, I was thoroughly confused. To my mind, it is important that we have clarity in this area. What does clarity mean? It means perhaps two things: that during normalbusiness as usualtimes, there is a proper exchange of information and a no-surprises regime in place, that decisions are made where decisions need to be made and, at times of crisis, somebody is in charge. That does not seem yet to have come through properly.

Adrian Coles: If we go right back to the beginning of the crisis with Northern Rock, there was clear evidence of a lack of communication between the tripartite. If we are going to keep the tripartite arrangement in place, it seems sensible to have a Council for Financial Stability or something similar, and to formalise the communication arrangements between the members of the tripartite, to report on them annually and to have publication of minutes. It is a modest move in the right direction.

Matthew Fell: I think that I agree with that sentiment. In the context of making the existing tripartite set-up work better, this should do two things. It ought to give greater clarity to who is in charge, who ultimately has to be the Chancellor particularly in times of crisis. One of the lessons that we learnt from the crisis was that there was a serious lack of intelligence gathering and sharing, certainly during the broader overview of emerging risks. If it can bring more of that together, it will be helpful. The area of greater clarity that needs to come through is who will take responsibility for actions arising from the analysis that the council undertakes. Who will actually push the buttons once the analysis and discussions take place?

Mark Hoban: At the moment, we publish a report that identifies risk, but nothing that says who will do anything about it.

Matthew Fell: For me, it will be entirely sensible to understand how the analysis translates into action.

Adrian Coles: One would expect to see that in the minutes. Any organisation taking minutes of a meeting will usually have an action column. Let us hope that this council copies conventional practice.

Angela Knight: On the question as to whether it should or should not be written into the Bill, as we understand it more will be made clear through the terms of reference, and draft terms of reference have already been published. I think that we said in our written evidence to this Committee that what is required is the particular contribution of each of the authorities sitting around the councilhow they interact, their duplication, possible conflict to be avoidedand also the point I made earlier about who is in charge. So I think that in essence you can either say, There is a published draft terms of reference that has set all this out, or you write something in the Bill. If you write something in the Bill, that means that, should there be a desire to re-order the responsibilities, should they change for various reasons, or that you want someone else to make the decision, you cannot do that, because it is in the Bill. But equally so, if you put it in the terms of reference, the terms of reference can change all over the place.
If we think back through the last two years or soI do not think that any of us would ever wish to have any sort of replication of that, and hopefully that will never take place againone thing that is absolutely essential is that in a crisis someone has to take charge. If indeed there is ultimately public money involved, we need to know that it is this person, and that is the reason why. While it is debatable, I think I come down in favour of writing it in the Bill.

Q183Mr. Charles Walker (Broxbourne) (Con): Surely if there is a crisis, the Chancellor would take charge. I thought the idea of the Council for Financial Stability was to stop a crisis occurring. How is the council going to work with your various member organisations to ensure we do not end up in hugely leveraged positions, borrowing vast amounts of money that we have no hope of paying back if the pyramid starts to crumble? That is what I thought the Council for Financial Stability would be doing with your members.

Angela Knight: Yes, well, that is another reason why I answered the question as I did in the first instance. I am more confused now, having read the evidence earlier, than I was when I originally looked at the Bill. Irrespective of what the legislation may include or how it is phrased, it is the interaction and the prevention that has to be the vital area. I would say this, though. There is not some sort of discrete pot called financial stability that is separate from, say, monetary policy, which in turn is separate from fiscal policy. The three are intertwined and I look forward to some thinking being done in that area, otherwise there will be an assumption that financial stability can only be done by a something for financial stability and that it is separate from the other two levers.
There is an obvious example, if you like, when a bubble is created, whether it is a housing bubble or similar. You can usually address a bubble in three ways. One is by taxing it, the other is by using interest rates to deflate it, and the third is by addressing those who say lend into it, and that is what I mean about them being interconnected. I appreciate this Bill is about establishing things, but before we get too far along the path, we need to have some very clear thinking about how these three thingsstability, monetary policy and fiscal policyintertwine and are interconnected.

Adrian Coles: Yes, I would agree with that, but the Council for Financial Stability, as I said earlier, is a modest measure that will contribute to the debate that Angela has just spoken about. Of itself it is not going to prevent the next bubble, it is not going to prevent the next banking crisis, but it might make a modest contribution towards that objective.

Matthew Fell: I would agree with the previous remarks. The one additional thought that I would add, that goes directly to your question about working with the various organisations that we represent, would be the importance of having a proper mix and spread right across the breadth of the financial services community, and that it is not biased towards one component part of it.

Q184Mr. Walker: I suppose what I am driving at is that if you want to try to secure financial stability, you have got to have a better understanding of the financial instruments being traded. It was the case with Leeson, wasnt it, that the board of BaringsLeeson wasnt actually doing anything complicatedjust did not understand what its trading floor was doing? The lessons of that do not seem to have been learned. I would hope that, as new financial instruments are modelled and brought to market, there is a far greater understanding among your members, senior board members and the FSA as to where the risk lies, so that they have an idea of what is going on.

Angela Knight: Yes, I think that is a very important point. Leeson, with Barings, is not necessarily a terribly good example, because I think there was a bit of fraud in therein fact, quite a lot of fraud. So in one respect I would almost park it. Nevertheless, the fundamental point about the complexity of financial instrumentsnot only how they impact, but how they are interconnectedis a vital issue. That is being addressed elsewhere. It will connect into financial stability, but it is being addressed elsewhere through the regulatory framework, which is a mixture of transparency; capital and the application of capital to risk; risk controls; and utilising some risk set-off techniques, such as central counterparties for certain types of derivatives.
The industry is innovative and that innovation, you can quite easily argue, has created some instruments that we look back on with some debate and some serious concern. However, it has also created instruments which, through their innovation, have provided significant benefits as well. If you are saying to me, must we as an industry actually address the reality of what is being developed in a much clearer, coherent and careful way in future, then the answer from the industry is Yes, we understand that. The balance between innovation and risk is now in a very different place from two or three years ago.

Adrian Coles: I have one extra point. I agree with what Angela said. In a sense, is this being addressed in the components of the CFS? The FSA certainly has much more technical expertise to understand market developmentsas I experience it, in the building society sectorthan it had two years ago. It is staffed up on technical expertise, so it can understand what is happening in the markets. Hopefully, that will make a contribution towards financial stability.

Angela Knight: We need to staff it up more. There has long been too hard an interface between those who work in the industry and those who work in regulation. We need to get a better way of getting people into, and of course out of, the regulator, because that way you have people who have up-to-date knowledge of the market. There is an example of a body that seems to do that quite well in this country, and that is the Takeover Panel. Maybe there is something in the way that it has managed to undertake that bringing into, and letting go back into, the market that needs to be learned, certainly at senior levels, and particularly in some of the wholesale areas, as far as the FSA is concerned.

Adrian Coles: That is happening in the FSA. It needs to happen more.

Angela Knight: Absolutely.

Q185Mr. Walker: I have one final question, and then I will allow other colleagues to get in. There are obviously very technical financial instruments, which people perhaps did not understand fully, that caused some of the problems we have had, but there are also some much more obvious things, such as 125 per cent. value mortgages. Do you hope that the CFS will do better, not just at looking for fraud in the selling of mortgages, but in saying, Hang on a second, are we really comfortable allowing people to borrow 125 per cent. of the value of their home? I doubt we will ever allow that to happen again, but if it was to start re-occurring, would you expect a more interventionist approach?

Adrian Coles: I would expect a more interventionist approach. I do not think the CFS would be looking at that sort of detailed thing. We have got a mortgage market review that is going through the FSA; it is out for consultation at the moment. I would have thought those sorts of detailed rules, analysing those sorts of loan-to-value ratios, would be within the FSA and handled at a lower level than the CFS. That is what I would envisage. I would imagine the CFS being more macro-prudential.

Angela Knight: I would agree with that, but just add one rider to the point that Adrian Coles has made. The drop in value of property can mean that you have people who took out a lower loan-to-value mortgage on their property. Now, because of the drop in value, the loan-to-value is much higher. I think we have got a transition phase where there will be some high multiples, simply because of that. We must deal with them in one pot. Then there is the new lending, and on that I agree entirely with what Adrian Coles has said. In addition, the application of the new capital rules against risk will reinforce a certain type of lending, which will be different.

Matthew Fell: The distinction between what it will be the job of detailed regulation and the regulator to do, and what you would look to the Council for Financial Stability to do, would beI absolutely agree with Adrianthat the regulator would look at what is going on in an individual institution. The job of the council would be to say there is scope for diverse product-offering right across the market, provided that the products are priced accordingly and the right checks and balances are in place. Of course, to have choice and competition in the market, you are going to have some riskier products that are priced accordingly. If every single player in the market is offering that riskier product, the job of the council would be to identify that risk right across the piece. It is the job of the regulator to look at the individual firm and say, What is the product offering? What is the risk appetite and are the proper safeguards in place against that? That is how I would see the distinction.

Q186Mr. Colin Breed (South-East Cornwall) (LD): Adrian, you said that there is a modest step in the right direction on the tripartite because, essentially, the proposals formalise certain things. We now know we are going to have quarterly meetings, and apparently the minutes are going to be published. That does not preclude it having meetings at other times. As soon as it has a meeting that is not a quarterly meeting, it will appear on Mr. Pestons blog, and there will be scurrying around, and phone calls and everything else about the reason why. Then somebody will be paid a sum of money to say what it is all about. The very stability that we are trying to identify and address could be the cause of that happening.
With the old tripartite, we did not know when it met, or whether it ever did meet. We never saw any minutes. Therefore, to a certain extent, discussions concerning the sensitivity of things would have been under the parapet. Suddenly, the formalised stability council would have to meet and publish its minutes, presumably within some period of timethere is not much point in publishing them a year later; I assume that, a bit like the Monetary Policy Committee, that will be done within four or six weeks, or something like that. Do you think that might precipitate instability rather than address it?

Adrian Coles: I suppose it is possible that the circumstance you describe could happen. The Bill says that it must meet at least every quarter. It does not say that it must meet only every quarter. It may well meet monthly, or even more frequently. I dont think it precludes other less public conversations between members of the tripartite, if that proved necessary, in respect of particular institutions or particular circumstances arising in the markets. No, I think it is helpful to formalise relations between the tripartite, but I do not see the Council for Financial StabilityI dont know what others thinkas the only mechanism for the tripartite getting together and discussing current events.

Angela Knight: In many respects I think you have hit the nail on the head

Q187Mr. Breed: Scrap the council?

Angela Knight: No, I wouldnt do that, but you can put in place steps for stability and then find that they are themselves the cause of instability. Indeed, we all see what happens in the run-up to the Monetary Policy Committee meeting when there is a view that perhaps interest rates are going to change. There is much speculation in the market beforehand. There is much breath-holding, and then commentary on whether people think it has made the right decision or the wrong decision, and whether people are disappointed or not.

Q188Mr. Breed: Thats a scheduled committee.

Angela Knight: Absolutely. To a certain extent, you can see that a similar sort of thing could happen with this council, certainly at the start and at times of difficulty. That is why we made reference in our written submission to things such as a no-surprises regime. By that I mean that you have to have clarity of what is said. I suspect that everybody sitting around the tables here is well aware that you can read a civil service report that says everything, but in which the clarity of what is meant is not good. We put that in our written evidence for that reason, and secondly, because there will be times when either you cant wait for a formal meeting, or if you had one it could cause a problem. I am sure that people are very capable of picking up the telephones and having the necessary discussions. We cannot, surely, afford to have a regime put in place in which the proper issues are not discussed in a manner that allows decisions to be taken in the right and proper way, and in which there are destabilising consequences, unnecessary delays or obfuscation about what is meant and the issues that are being considered.

Adrian Coles: I am absolutely certain that the members of the Council for Financial Stability will meet without calling their meetings meeting of the Council for Financial Stability. That is absolutely clear.

Q189Mr. Breed: There will be formal meetingsthe quarterly meetingswhich will be pretty uninspiring, unhelpful and everything else, and the meetings that have any substance will probably be held informally.

Adrian Coles: That might well be the case. If you look at the published minutes of the FSA, for example, they are hardly the most open and useful set of documents. One of the fears, I suppose, is that the CFS minutes that are published might be closer to those of the board of the FSA, and further away from the useful minutes published by the Monetary Policy Committee.

Angela Knight: Perhaps we should say that we look forward to the subsequent scrutiny by the Treasury Committee of the Council for Financial Stability.

Colin Breed: We shall enjoy that.

Q190John Howell (Henley) (Con): I want to pick up on some consumer issues, starting with the consumer financial education body. I would like to know what it needs to offer, in your view, that is not already being done in the market and that is going to make a difference.

Matthew Fell: The starting point is that in this whole debate consumer education clearly has a very important role to play. What is important, and what perhaps needs greater clarity than is suggested in the Bill at the moment, is who derives the benefit from it, and therefore who picks up the tab, essentially. There is broader public interest in improved financial literacy right across the public; that does not come across in the Bill at the moment.

Q191John Howell: I think we would all agree with the need for financial education in that. What I am trying to get at, on the way in which the body is set up, is whether you have any confidence that it is actually going to deliver that, and whether it is going to deliver anything that is in addition to what is already being offered.

Matthew Fell: The fundamental that it needs to get across is that individuals should fundamentally understand the risks that they are taking on and what situation arises if things dont go to plan, or if their circumstances change and payments cannot be made; they should understand the consequences of that. I think that it should be all about promoting understanding of the risk that consumers take on.

Adrian Coles: We need to be very clear what the new body is going to advise people on. If you look at the impact assessment that the Treasury published on this, it says that 38 per cent. of those getting face-to-face advice are getting advice on social security and tax credits, and 8 per cent. of them are getting advice on tax. It seems unfortunate to me that building societies and banks would have to pay to fund an institution that is offering advice to people about the complexity of the tax and welfare benefit systems. I think that there is a strong case for saying that perhaps the Government ought to be financing questions about the way that they provide financial support and the way that they tax people.
If you look at what proportion of face-to-face advice is given on mortgages, which is clearly a big building society interest, you see that only 9 per cent. of those going in to get face-to-face advicethis is in a pilot run in north-west England to test how this would all workare getting advice on mortgages. We need to be very clear what advice specifically the new body is giving, or is paying other agencies to give. One big difficulty will be if it moves out to being general financial advice, according to the broadest possible definition of that term; that will demand an almost bottomless budget, and we must guard against that very carefully.

Angela Knight: In answering your questionwhat will the body add to what is being done at the momentwhat is being done at the moment is actually pretty significant. There are individual programmes done by individual banks, both in schools and in areas, and various other initiatives provided through a number of organisations, such as Moneymadeclear and the Personal Finance Education Group, which deals with financial education in schools. There is a plethora of different programmes and initiatives focusing on the business of financial education both in and out of schools.
If the new authority is going to be able to contribute positively, there needs to be careful scoping of what it is going to do. It needs to be very well managed, because you tend to get people with lots of good intentions getting involved on these sorts of bodies and that is excellent, but it has to be managed well. They have to decide right at the start how they are going to measure outcomes: what counts as success in this area? Part of that is about getting to people, but part of it is about getting to them in such a way that they recognise the information as being the information that they wanted and that is going to help them with their financial affairs. The body needs to be subject to some form of external scrutiny, such as that provided by the National Audit Office, so there is a proper review of what it is spending, how it is doing against the targets that were set, what those targets should be and how you measure outcomes. Otherwise, we will all continue to pour money into financial education without enough observable result.
In part, we see this as a separate authority and in part we see it as picking up the failure in the education system to get financial education across. Clarity at the start, a review process, proper understanding of what the targets are and measurements of the outcomes are vital. Otherwise, it will take over from what has already been done and we will just move from one not particularly coherent system to one that is perhaps more coherent, but is not coming up with any better answers, and the price that we are all paying will be much higher.

Adrian Coles: Just one further point: I think that there is a risk, in a very low-margin environment in the building society sector, that if there was a significant call for fees on building societies to pay for this new body, the obvious route for a pressed board of directors to take would be to reduce the expenditure that many societies undertake already on this issue voluntarily, in their own areas. So not only might it not add to what is currently available, but it might also ultimately reduce what is currently available. I am not saying that that is a threat or even a likelihood, but it is a possibility.

Angela Knight: It is a reality of life. I think the levy for financial education at the moment by the FSA is about £25 million on our members, and we can add probably another £50 million or £60 million, perhaps more, that is being spent on that area already. If I am getting close to £100 million right now, then that is a lot of money, which is another reason why we have to be clear, careful and coherent. In some of the welfare areasthis is what has come through from the various studiesit seems that that is almost a better role for something like Citizens Advice, which has huge expertise in that area already; of course, we already partially fund it. So let us get into a bit more detail first.

Q192Mr. Horam: Given that it is going to be largely the same people doing the educating who have been doing it so far, do you have any problems about the credibility of the new body?

Angela Knight: Yes, of course, there are problems about credibility and that is why we say we have got to scope it properly in the first instance. If it looks like it is just some sort of endless quango, then it joins the other list of quangos. There are some good people who work in this area already. If it is scoped properly, has a good board, is obvious how it reports, has clarity of message and purpose and good management, it will have credibility. You have to start it off right.

Adrian Coles: If I may pick up on a point that Angela made a moment ago, I had assumed from reading the Bill that this new body will provide finance to bodies such as CABs, so that CABs can deliver what the new body wants delivered. I assumed that CABs were going to be an agency of this new body.

Angela Knight: That is why I say it has got to be clear because it is not clear.

Adrian Coles: Yes.

Q193John Howell: May I move you on to consumer redress? What would you like to see done differently from what is set out in the Bill? How would like to see the consumer redress issue approached?

Matthew Fell: The proposals, as set out in the Bill, are perhaps the single biggest concern for us. It is absolutely right, it is important that consumers have proper routes to redress and that needs to be built on, but we see no evidence that what is proposed in the Bill is proportionate to the problem to be tackled. In our analysis, the proposals for collective proceedingscontrary to what the Minister told the Committee earlier this weekdo bear all the hallmarks of US-style class actions. It would be the first time that we are introducing collective proceedings on an opt-out basis in the UK. From our perspective, that is a pretty dangerous precedent and we think the chance of containing it, as set out in the Bill, once the Pandoras box is opened, is very limited.
We would also draw attention to the fact that what is proposed in the Bill runs contrary to the Governments own response to the Civil Justice Council report earlier this year, where it says you should introduce such measures only where there is evidence of need and after consideration of alternative proposals; that adversarial civil litigation is inherently risky and costly; and that regulatory options should be considered before court-based options are introduced. For all of those reasons, we see this as a fairly dangerous path to go down.

Q194John Howell: Adrian, do you want to comment on that, particularly the impact it is likely to have on the way your members run their businesses?

Adrian Coles: I would just add that I think this is being introduced in a very accelerated manner. This is of such fundamental importance, as I think you will gather from the CBI comments, that you would expect it to be an issue that is widely consulted on in advance before it turns up in a Bill of this nature in a pre-election period and rushed through the House. You would expect wide and lengthy consultation at periods and an opportunity for all concerned to make their points. It all seems rather hurried to me. That is the first point.
Secondly, I think there must be, even now I hope, a lot of consultation about how this is going to work. Who are the affected people in the class? How are you going to identify who they are? Are people going to be included in this class action without being told? What are the characteristics of the members of a class that are going to be included in a class action? This seems hugely complex and at the moment I do not understand how it is going to work, which means it could have all sorts of unintended consequences.

Angela Knight: There are two parts to the consumer redress issue: the collective action and the consumer redress schemes later in the Bill. To take the collective action first, I share the concerns of my two colleagues. It does go against the Civil Justice Council report recommendations, which are quite good recommendations because they were looking to see how, in a UK legal context, you could start to introduce that type of process. In the Bill, however, we have not only a US style, with all the issues that flow from it, but the ability to clog up the courts as a consequence. Therefore, there needs to be some careful thinking about who could be the representative body and how these things operate.
We also see in the Bill that just about everything of substance is passed to a secondary legislative process through regulations, and to introduce something into UK law that is foreign to UK law through regulations, for which there is only the possibility of a consultative period, strikes me as something that I would ask to be very carefully thought through before going down that route. It does not seem to be the way to proceed. Among all the things that are proposed to be deferred, what is of vital importance is not only who counts as a class, but the ability to lift the statute of limitations. To put the lifting of the statute of limitations into regulations is extraordinary. There could be reasons for changing the statute of limitations, for example, if you have someone in train while the case is being considered, and under the statute of limitations, it could time out. There could be reasons for doing it, but you do not do it through regulations. If you want to do that, it has to be face-of-the-Bill stuff. There are inadequate arrangements made for even the proper consideration of the process, as well as the process proposed here, which is US-style. It is a very risky step to take; it is a much deeper exercise than just a provision in a couple of clauses that throw it over to regulations at a later date.
On consumer redress, which seeks to give the FSA a better handle on areas where problems seem to be arising in interpretation of the rules, there is a point to having that. There is also, by the way, a point in having collective redress. Please do not think that I am against that; I just highlight the issues that need to be considered first. In this area, we are talking about giving the FSA new powers under what is known as section 404. Again, there is a lacunaeven a fewin this area under the existing financial services Act. If the FSA is to have greater ability to use its 404 powers to come to conclusions where rules are unclear and where issues need to be addressed, it cannot just have, as is set out in the Bill, the ability to decide, without external consultation, what it believes the law is, or could be, under certain circumstances. We have to bring in the legal system early. Otherwise, there will only be subsequent legal cases about whether the FSA assumed the legal outcome correctly, having not taken advice in this area, and just sought to act. That is the first thing.
Secondly, it would also be real sweeping powers, which I do not think would be appropriate, for the FSA to be able to proceed down that route without there being a check and balance, where there is some form of independent assessment as to whether the way in which the FSA believes its rules should have been interpreted three, four or five years ago was correct. That is what this is all about.
The wider issue that has not been addressed in the Bill, which worries me, is the lack of stability in the retail regulatory framework in the first instance. If we were starting again, what we would need to dosomething that is much more appropriateis to provide stability in retail regulation first. That means a much better co-ordination of how the law works between the ombudsman and the FSA, and, as a very significant part of retail regulation actually sits with the Office of Fair Trading, a reassessment of how its roles and responsibilities fit as well.
What we are doing in those two areas, in effect, is looking at fixes for a system that is not working particularly well. That is always a risky thing to do. If we are doing fixes, and if that is the way that Parliament ultimately decides to go, those fixes must have legal certainty about themthey cannot be left without legal certainty. Secondly, there must be checks and balances to work through; otherwise you are disbalancing the system. You are not hearing from the wider community of interest and we will ultimately have a worse outcome through the courts being bunged up with more judicial review and unfairness cases than we have at the moment.

Q195Mr. Hoban: On Tuesday, we asked Andrew Whittaker, the general counsel at the FSA, about the whole issue of collective redress and uncertainty. He seemed to believe that the processes within the FSA would be adequate. We discussed with him the bank charges case that concluded recentlyit had been through an initial court hearing, then several layers of appeal before ending up at the Supreme Courtand asked him how he was going to make sure that the process for the FSA under the redress proposal would be equally robust. His comment was that it would have a legislative process, a cost-benefit analysis, formal consultation and scope for judicial review. He went on to say that he thought that would be speedier and more efficient than the court process. Would you agree with that analysis?

Matthew Fell: The two fundamental problems are the ones that Angela alluded to. One is that there is not sufficient check and balance in the system as currently proposed. The second would be the opportunity for both parties to have input at the opportune time. It seems to me, at the moment and as the Bill is drafted, that, in terms of the input of regulated firms, they do not seem to have the opportunity to put their voice into the mix at an early stage in the process.

Angela Knight: If I refer you to the Bill itself, clause 26 on section 404 states that the provision will apply if it appears to the FSA that,
as a result, consumers have suffered (or may suffer) loss or damage in respect of which, if they brought legal proceedings, a remedy or relief would be available in the proceedings.
What that is saying is that the FSAthe authorityis making an assumption about what would be the outcome of a legal process. Frankly, you cannot do that. There is either a legal process and decision, or there is not a legal decision. In other words, you might say that what that clause is giving to the FSA is the ability to act as prosecution, judge, jury and so on.
There is always judicial review, but judicial review as a check and balance in a system is a backstopit cannot be part and parcel of a normal process. The clause notes that the provision applies if it appears to the FSA, but if it does not appear to the industry that it has to go to judicial review, or if the FSA decides that there is not a 404 issue, the consumers will say, We dont think thats right, and if they cannot do a judicial review here, they will go up the collective redress system. All we are doing is providing a greater degree of uncertainty that we feel is of very serious concern.
We therefore propose to bring a court involvement in at a very early stage. Not all courts take years and years, and we already have examples in the UK. In insolvency, for example, a scheme is put to a court, which decides on the basis of that scheme. If there is going to be a revision of section 404, broadly in the context envisaged by the Bill, we need to have the certainty of what the legal position is, which means an early involvement of the court so that decisions are not subsequently challenged. Secondly, there also needs to be some mechanism before we even get to that court for deciding what the issues that the FSA is seeking to address are.

Adrian Coles: I will just build on one other point, slightly off the question, but one point that Angela made earlier. There is another tripartite involved in all this: the FSA, the OFT and the FOSFinancial Ombudsman Service. Already talking about modest proposals this morning, it may not be a bad idea to have a council for consumer affairs, made up of that other tripartite that Ive just talked about, because there is significant confusion at the momentcertainly in the minds of regulated institutions, and it would not surprise me at all if in the minds of consumersabout the respective roles of those three bodies and how the rights and duties of consumers are determined within that particular tripartite. Just a little example: right at the core of the market at the moment, the FSA is responsible for the regulation of current accounts when they are in credit and the OFT is responsible for the regulation of current accounts when they are in debitoverdraft. So, you can have the regulatory authority for someones current account changing several times a week. Theres a little example.

Angela Knight: Which is the instability of the retail regulatory system. That is where we should be starting, not looking at fixes of what is inherently an unstable regime in the first instance.

Q196Mr. Hoban: Is that not part of the problem? I wonder to what extent the FSA needs to sharpen up its act when it covers due protection of consumers if we think that collective action is the appropriate form. You are offering a heavilytightlyregulated area. What is it that the regulators are not doing that means the consumers need to be in a position to take collective action?

Angela Knight: The Financial Services and Markets Act 2000, under which we currently operate, did not envisage circumstances in which you could have, for example, internet campaigns or you could download letters off websites and say something is unfair or mis-sold, therefore creating large numbers of complaints going to an ombudsman and somehow needing to be handled quickly and effectively. This is an environment that has changed substantially.
The issue with the way that the FSA and FOS interact at the moment is that the FSA can, yes, make rules and interpretation of the rules; and the FSA can of course say, In our view, this is the way that consumers ought to be treated in a particular area. But because the ombudsman has to decide a complaint in a broader context, taking into account every aspectits broader than just the rulesyou have an inherent ability within the system for one side to come to different conclusions from the other. That means that if you have got an issue that is significant across the sectoror indeed even significant for one firm, because some firms are very largethe FSA can come to a conclusion about how that is dealt with, although that does not necessarily mean that the ombudsman ultimately, when looking at the complaints, comes to the same conclusion. There are a number of well-recorded incidents in which that has happened.
What needs to be addressed here is the ability for the FSA, first, to come in quicklyusually it is a rule interpretation, and I will come back to the reason for that in a moment. It needs to come in quickly with a rule interpretation and to clarify that interpretation, with that interpretation then to be applied by the ombudsman. That cannot really happen now. It can be done, but the ombudsman does not necessarily have to accept that clarification. The Bill does nothing to fill that problem. It only takes up the issues in more extreme cases.
Even now, if we are going to move to a greater degree of stability, the FSA, yes, needs to operate under high-level principles within the retail spacealso have rules, but also have much more guidance as to how you can evidence the two by the rules. If you employ 1,000 people, you as a firm are actually doing that guidance anyway internallythere are very detailed steps as to how that rule is evidenced. So, if the FSA or indeed the ombudsman actually says, Ah, but our view is different, suddenly you have a very big change indeed. That role of how you give evidence that you have abided by the rule and clarification of what the rule means is vital if we are going to get a better system that is not always defaulting either to large numbers of complaints or mass consumer action.

Q197Mr. Hoban: But does the FSA have the power to do that early clarification? Is it a lack of will or a lack of powers preventing it from doing so?

Angela Knight: As long as you have a difference between what the FSA says that a rule means and how an ombudsman has to interpret itI do not want to put words in the ombudsmans mouth, but if you asked him the same question, he would come up with a similar answer to me. So, as long as you have a difference between what the FSA says is an interpretation and how the ombudsman then has to use it in looking at a case, you will have a tension in the system.
In addressing 404 within the Billas it is outlined at the momentit binds the ombudsman into a decision. You might well ask yourself why that was necessary. I hope that, in a somewhat inarticulate manner, I have at least given you the answer to why it is necessary, because at the moment the ombudsman is not bound. As the ombudsman has to look at things from a different perspective, he can and will come in many instances to a different conclusion. That means that the resolving of issues early is made very difficult indeed.

Q198Mr. Breed: Before we go on to so-called living wills, do I take it from what you have said that you would prefer the current split of responsibilities between the OFT and the FSA to be reconciled in one body or the other?

Adrian Coles: It is certainly confusing at the moment. I think that it either needs to be formalised, so that it is very clear what the respective responsibilities of the two bodies are or, preferably, we should move towards what the objective of the legislation was in 1997: a single regulator. At the moment there are three regulators in the consumer space in financial services. The ombudsman is clearly a regulator through the decisions that it takes. The OFT is clearly a regulator on credit, and it is very odd to have one regulator on credit and a different regulator on depositsin the example I just indicated.

Angela Knight: It certainly needs to be rethought. There is not actually an easy and simple answer, because credit is granted in a very plural way in the UK. It is granted by entities that are not financially regulated, for example. If you buy your car from a second-hand car salesman, you may well take out a loan to do so, but you are taking it out through the auspices of that garage, rather than directly with a financially regulated organisation.

Adrian Coles: If I could briefly interrupt, if you buy insurance from that second-hand garage or seller, the insurance is regulated by the FSA. The credit would be regulated by the OFT.

Colin Breed: There is real consumer confusion.

Angela Knight: There is indeed. And there is confusion by us. If I was going to say, Where do you start?, you start by putting together all the regulations surrounding consumers for those financial institutions that are already regulated by the FSA. That is where you would start, but it may not be where you conclude. Meanwhile, consumer credit anywhere in the UKthere is a lot of law surrounding that, a lot of it coming from Europe. That is not necessarily obviously meshed together, so you cannot simply pick up from one body and put into another body.
But, having said that it is not simple and having said that wherever we go it is quite difficult to see that you can get total coherence, what we certainly need to do is to start looking at a change. We cannot just leave it like that. Firms get confused; advisers get confused. It is not surprising the poor public therefore gets very confused.

Adrian Coles: To add a final point to that, there are seven different fairness regimes imposed by different regulators on UK financial services institutions. We have just published for our members a 100-plus page book explaining how they need to comply with all those different sets of regulations on how to be fair.

Colin Breed: And people still feel that they are treated unfairly.

Angela Knight: Absolutely.

Adrian Coles: Absolutely.

Q199Mr. Breed: Can we move on to these three recovery and resolution plans? I have to say that I am not necessarily a great supporter of the whole concept. I am finding it difficult to see how this will work in practice without some quite serious repercussions. First, can I get your general view as to the need for them as such? If there is a need, how does that work on companies operating in international markets, where those international markets might not be participating in anything like the so-called living wills regimes, yet they could actually have repercussions on the business that they do in those countries?

Adrian Coles: My members do not operate internationally, so I will not comment on that particular point.

Angela Knight: Living willsrecovery and resolution plans is the name for themare the hot topic of the day in the international forums. You do not, by the way, need to have a law to implement them. Perhaps I should also say that to put a statutory duty into a piece of legislation for the FSA to produce something, where they and we have not decided what it is, and where the requirements anyway will start to flow from the international authorities, strikes me as premature at the very least.
The main proponent of the scope and detail of what will ultimately be meant by a recovery and resolution plan will come from the Financial Stability Board charged with that responsibility by the G20. And yes, it is quite correct that we will ultimately implement here in the UK for all those entities who operate here, whether you consider them UK companies or not. What a recovery and resolution plan can be is anything from a 20-page booklet, which gives an indication of the interconnectedness of the various parts of that organisation and what actions they would take should a problem arise, through to something immensely complex, which would have the effect of that organisation and its component parts almost having to operate, capitalise and provide liquidity as though they were separate stand-alone entities.
There is obviously a gut instinctive view, which I share, which says that you have to have as an organisation a good idea of what your plans are should some big event arise, which seriously affects your model, such as we have had with the world financial system coming to a halt, but that is very much at the aggressive end. There will be other things as well, and I subscribe to that. But there is such a range of options, such a huge diversity of firms, and such a lot of clear thinking that needs to be done, because there will be consequences for the real economy. Clear thinking will be done anyway by regulators, and it must take place internationally. To place in clause 12 responsibility on the FSA to go away and do it is probably inappropriate, if I may say, and certainly very much more advanced than we should be at this stage, particularly considering the international market that operates here. We may well frighten the horses rather than do what we all need to do, which is to give coherence, stability and a very strong message out from the UK that we are a good place to live, work and do business.

Adrian Coles: Moving right away from the international markets to small local building societies, I am far from convinced that living wills are required for the smallest half or two-thirds of building societies. The Chancellor said on Second Reading that living wills would be needed for large banks and some building societies. That is debatable. The Bill seems to place an obligation on the FSA to put in place regulations that would require all institutions that are deposit-takers to prepare living wills. That seems to be an overshooting of the requirement as far as most building societies are concerned. They are straightforward institutions. There are straightforward exit routes for small building societies that get into difficulty. There is a willingness on the part of many institutions to absorb them without any significant impact on the business of the larger institution. We need to ensure that the FSA is able to provide its usual cost-benefit analysis to these rules rather than be forced by the Bill to do this. I very much hope that we dont end up as a result of this Bill with yet another onerous requirement put on small institutions, which results in them having to undertake work from which they will not benefit, but which they will have to spend considerable resource on doing.

Matthew Fell: I absolutely recognise Adrians comments around proportionality. Overall, we certainly think that living wills can have a place in the toolkit to manage systemically important firms. If the idea is to say, Can you have something that helps arrange an orderly shutdown of either a part or a whole of an institution without it contaminating the rest? that would be a laudable aim. I have three notes of caution on this. One would be some of the comments Angela was alluding to. If the UK front-runs what happens internationally we could be in danger of setting up either conflicting or contradictory requirements on UK-based firms or putting in place more prescriptive or onerous measures for the UK than is the case internationally. That would be damaging to our overall competitiveness. Secondly, there would be a danger if this serves to create a uniform business model. That does not seem a very sensible place to end up; if every institution is thinking exactly the same and this sort of drives everything down one road, that would not be a very good idea in terms of managing risk and diversification. Thirdly, as people have alluded to, the timing of thiscreating a statutory duty on the FSA before we have even nailed down what the objectives arewould seem premature. That is a phasing in and timing issue.

Angela Knight: Dont forget it is recovery and resolution, not just resolution; there is a difference. Can I, as a large financial entity that hits a real problem, recover from that, or do I have to go into the resolution regime that flowed from the Banking Act of earlier this year? There are two different things; they are not the same.
Adrian Coles mentioned the cost-benefit analysis that is necessary. We need a wider economy impact analysis in this area and many other areas, because there is an increasing assumption that more regulation and more costs can be absorbed somehow, amorphously, by an institution with apparently no external effect or impact whatever. That is not correct. If you increase the cost of operation of anything, that ultimately increases the costs of the goods and services provided to the customers, limits the goods and services provided to customers, or does both. It is the same in the financial world as it is anywhere else. Impacts on real economy from many of these changes are essential, anyway. It is just that we are so far from even starting discussions on what the international authoritieslet alone the local authoritiesare thinking about recovery resolution that this is seriously premature.

Adrian Coles: Just picking up on Angelas point on recovery, the FSA already requires building societiesand, I am sure, banks as wellto have contingency plans in place for a very wide range of possible occurrences. We have held a number of conferences for our members, taking them through what to do if you get a run, if you run out of liquidity, or if adverse media comments that are untrue affect your institution. Many of these things are already covered. To go back to Angelas final point, we need to be careful of just building layers of regulation on top of what already happens. The question is, Does this actually add anything? That was a point we started off the session with.

Q200Mr. Breed: There are two other Rs that might come before recovery and resolution. Will these plans make potential risk more transparent, and will they make the institutions potentially more resilient?

Angela Knight: I would say that if you start off with just a plan, and that plan sets out the various aspects of involvement and potential interconnectedness of the business that you undertakedont forget that Chinese walls mean that sometimes that interconnectedness is viewed at a higher rather than a lower level, and has to be viewed that way by requirementand, as is happening elsewhere, there are both greater responsibilities placed on risk officers and a much greater focus on risk from the board downwards, inevitably as you start to draw up that plan there will be changes to what you do and how to do it that may well flow much earlier. That is simply because, as you rightly say, you have greater transparency and understanding, perhaps, of some of the ways in which different arms of your operation are working and connect together. That is the important aspect. That is the thing with which we all agree. We are talking about the high-level, gut-instinct view of what these things need to be.
Resilience is a mixture of understanding your risks, and of providing sensible and coherent mechanisms for addressing those risks. The question is Does that flow?, and the answer is Yes, in part. But what I have just said in answer to your question is not what is written in the Bill, and it is not what we knowor do not knowabout how the international authorities are developing in this area. Therefore the nature, extent, breadth and depth of what is going to be required in the recovery and resolution plans remains, at this stage, unknown. That is something that is of concern to the industry, and it can be very costly. We do have various mechanisms in place. Is it going to be necessary? Probably, but on the depth, we need to wait and consult. We need to be very careful that it is not just an additional overlap, but that it does the things that we want it to do, which is to enable better concentration on the risks that an organisation is running.

Q201Mr. Hoban: May I follow on from this line of questioning? This debate has focused on resolution and recovery plans for banks and building societies, but of course the scope of the Bill can potentially go beyond that. It says that the regulations must cover authorised persons subject to part 1 of the Banking Act 2009that is, banks and building societiesbut that potentially means that other organisations in the financial services sector could be covered. Matthew, the CBI represents a broader swathe of people than either Angela or Adrian does. What are your members comments on, say, insurance companies or asset managers being required to set up these plans?

Matthew Fell: Well, it is absolutely the same message that Adrian was talking about: there should be a sort of proportionality test. The members would absolutely say that. If we had an insurer represented on the panel here today, one of the first things they would say is Insurance isnt banking, so make sure that what you put in place is fit for purpose for all, and that you are not just designing something for one component part of the overall system. They would absolutely share those concerns.

Q202Mr. Hoban: Is it your expectation, though, that these plans will be rolled out to insurers, asset managers and other financial services businesses?

Matthew Fell: As we see the text in front of us today, that is absolutely a possibility. If the question was, Is that the intention? or Is that appropriate?, we would have a different answer. That comes back to the systemic risk test, which is about the whole interconnectedness of institutions and the ripple effect that they have through the entire economy. That seems to be where we should be focusing our efforts: where do you draw the line to get the appropriate balance that is required for them?

Angela Knight: Of course, in the UK, you have banks that own insurers, and in continental Europe, you have not only that, but insurers that own banks. Suppose you have an insurer that, in the EU, owns a bank that operates as either a branch or subsidiary in the UK. Whatever we have done here becomes a bit immaterial if they have not done it over there. That is why I harp on about the issue of internationality.

Q203Mr. Breed: The Treasury Committee visited three capitals in Europe last week, and it certainly looks as if they are not going down that particular routeat least not at the moment.

Angela Knight: There are some countries that are very strongly against this. They say that it is unnecessary, and they are not going to require their industry to do it. Some of the countries that have said that are very big countries and are important to the UK.

Q204Mr. Hoban: Which countries are they?

Colin Breed: Germany.

Angela Knight: Yes, and France.

Colin Breed: We did not go to France. We went to Frankfurt, and it was clearly and wholly opposed there.

Angela Knight: It may be different at the point where they see whether it is a plan. Equally, you will find that many countries will say that the responsibility for all that remains with ourselves. How we wish to articulate is up to us, and whether to intervene or not is for us, not others, to decide.

Joe Benton: I dont think we will discuss other countries. Are there any further questions?

Q205Mr. William Bain (Glasgow, North-East) (Lab): One of the reasons why we got into the situation that we are in is the trading in credit default swaps and collateralised debt obligations. Are you convinced that if the Bill was passed, there would be sufficient tools in the FSAs toolkit to protect both the taxpayer and the wider economy from the excesses of those transactions, particularly since forms of them are beginning to be reworked in the US?

Angela Knight: I dont think it really has anything to do with those. The Bill is just sitting in a different place. I suppose you can argue that living willsrecovery and resolution plansand things such as the Council for Financial Stability have a relationship with that. However, the whole area of credit default swaps and other such instruments is being handled predominantly in work led by Basel, where the capital rules for the world are decided, and through work both in the EU and locally. The Bill is tangentialalthough it has an impactto the work that is being done elsewhere. Even if we did not have the Bill, the work could continue. As for the way in which derivatives, as we now understand them, and new derivatives or new financial innovations are constructed, capitalised and made transparent, that is all being done elsewhere. That would all continue regardless of whether the Bill becomes law or not.

George Mudie: Thats a bit patronising.

Angela Knight: Sorry. It wasnt meant to be patronising.

Q206Mr. Mudie: Well, it was, but I am sure that your apology is accepted.
You say that these things are all about Basel, but they are very much about the FSA. In fact, at this cosy bankers conference that is going on this week, I hear that Paul Volcker said that the practices are continuing and that bankers have learned nothing. That is very relevant to the FSA. If Colin and I were to attend a Treasury Committee meeting and someone from the FSA came before us, I would want to know what the hell they were doing, so I thought it was a very relevant question.

Angela Knight: I am sorry, George; I did not mean to be patronising.

George Mudie: I thought you were throwing your weight about.

Angela Knight: I did not mean to be patronising at all. The responsibilities of the FSA in that area remain and are not changed by the Bill. That is what I meant, not that the FSA does not have a roleof course it does. The point about Basel is, if I may say, quite an important one. We put the Basel committees recommendationsthe Basel committee only makes recommendationsinto law across the EU through directives; in this instance, we are talking about the capital requirements directive. They can be addressed in other ways, but that is the predominant one. For countries outside the EU, though, it is up to their Government or local jurisdictions to decide what they do about capital rules. That is why you get variations. It was certainly the case with the last round of Basel that the UK and most of Europe applied it, but the US, for example, did not. I hope that this time, as changes are made in areas that are of vital importance to us and other parts of the world, those other people who sit around the table also actually make the changes that they agree at the table when they get back home.

Q207Mr. Hoban: May I follow up on that? There is something in the Bill that might tackle the issue of people trading instruments that people feel uncomfortable with or feel are too high risk, namely the powers under clause 14. It gives the FSA powers to suspend permission to carry on regulated activities. That is a tool the FSA could use to stop trading in collateralised debt obligations or to stop Northern Rock issuing 125 per cent. mortgages, as it was doing. Is that a proportionate power to stop some of the abuses that Willie mentioned?

Angela Knight: I see what you mean. I am not entirely sure exactly how the clause is expected to work, so it is quite difficult for me to answer your question. It has the power to stop a firm doing one of its regulated activities, which is a pretty broad power. I suppose you are right that it could say to a bank, You can no longer lend money on mortgages, or, You can no longer provide trading facilities for individuals trading their shares. I suppose you could do that under this power.

Q208Mr. Mudie: It would be useful if the FSA had done that and had had the power to say, You shouldnt be trading in certain financial instruments, because that trading was what poisoned the whole financial economy. But there we are. Well done, Mark.

Angela Knight: Yes. What the FSA could do right now is also arguable. Can it say to a financial firm, If you are going to continue in that particular operation, we require you to hold x or y more capital in order to do so? You are right: this power does give a bit more to the FSA at the moment, but it has quite a lot of ability to put in place some required checks and balances through its regulatory functions right now.

Q209Mr. Bain: The other point I picked up from your submission was that you were calling forcorrect me if I am wrongindividual transactions to be monitored rather than individual firms. Why did you go for that approach?

Angela Knight: I think you mean in the short-selling area.

William Bain: Yes.

Angela Knight: We are not sure that the short-selling clause has actually been written quite as intended. We look forward to further discussion on that. What happened last year was that the FSA stopped short selling taking place in this country at the height of the crisis. Some countries followed suit and some did not. Some that did not put some requirements and others did other requirements, so we had a right mess and muddle. The FSA used powers for market abuse to suspend short selling.
I think the question arises: what is the intention of the Bill? Is it to allow the FSA to suspend trading or stop activity in a certain instrument, or is it to stop certain firms from doing that activity? It would seem to us rather surprising, if, for example, the FSA said, Firms A, B and C can continue to short sell, but firms X, Y and Z cannot. That is how the Bill is written. It could alternatively say, Plc No.1 is having a terrible time, so you can all stop short selling in plc No.1. It could mean that. We do not really know. We also have a short-selling regime coming from Europe, so whatever happens here needs to tailor in with that. It may be that the wording of the clause is not meeting the intention of the power that it wants to give to the FSA. We need to explore that with the authorities elsewhere.

Joe Benton: Just before I call Mr. Love, I remind you that we have four minutes to go.

Q210Mr. Andrew Love (Edmonton) (Lab/Co-op): I am well aware that there are only four minutes left. Mr. Chairman, I apologise for arriving late and missing most of the session.
I want to follow up by asking whether, in principle, you support the idea contained in the Bill that under certain circumstances suspension of short selling is appropriate.

Angela Knight: Yes, we do. We just need to make sure that technically it gives the right result and we do not think it quite does that here.

Q211Mr. Love: Okay. May I move back to living wills? Earlier this week we tried to tease out of the Minister what the costs were likely to be, but because we are only setting up the framework, and the detailed work will go on between the FSA and the industry, we were not able to do that. I want to get an industry view, because you must have had consultations so far with the FSA and probably the Bank as well because it has the resolution part of the procedure. What is the industry view about likely costs, in the context of concerns about whether internationally this is going to be the way forward? Is that going to be particularly onerous on the City of London?

Angela Knight: It certainly could be if living wills are taken to a point in which the different activities that you undertake as, say, a large, universal bank, ultimately have to be separately capitalised with their own separate liquidity. Then it would be an extraordinarily expensive process and one in which we would have done very significant damage to the UK. Other countries would be laughing fit to bust because we would have handed the business to them. It would also be difficult for our customers if they see costs starting to rise.
If, on the other hand, we are looking at sensible plansand over a period of time we may alter some of the way in which we conduct activities as a consequencethat is just part of the natural development. The costs, therefore, are contained in those relating to updating, monitoring and so forth. It will be substantial; none of this is cheap. There is a huge difference between tens or twenties of millions and getting seriously into the billions. The range is vast.
In the discussions that we have had, there have been very interesting variations. For instance, you can speak to some people in the FSA and others in the Bank of England and they hold what seem to us to be noticeably different views. If we go back to the opening comments about the need for coherence among our tripartite arrangementor whatever we wish to call it in futurethis area is certainly a very important one.

Ordered, That further consideration be now adjourned.(Mr. Mudie.)

Adjourned till this day at One oclock.